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Becton bites the dust

Another major developer eats dirt today with Becton Group defaulting on loans to Goldman Sachs. The AFR reports:

Becton Property Group’s corporate entities have been put into receivership by the beleaguered company’s lending consortium, led by Goldman Sachs.

The residential and retirement village developer had been negotiating with its corporate lenders to gain the crucial debt waivers it needed in order to file its interim results this week.

Receivers from KordaMentha have now been appointed to four of Becton’s corporate entities, including Becton Property Group Ltd (BPGL), by the Goldman Sachs-Fortress Investment Group (GSFIG) consortium. Its operating companies are not included in the receivership.

“It is important to understand this is a very limited receivership, which affects the ownership and control of Becton but not the business operations,” administrator Mark Korda said on Tuesday.

Mr Korda is really quite busy at the moment but I’m wondering if this kind of Chapter 11 limited bankruptcy is what we need here. Maybe we just need some dead set Chapter 13 bankruptcies in the developer space with a consequent flood of cheap assets out of land banks and into fresh hands for better priced developments.

The central bank is doing everything it can to distort the market and keep asset prices pumped but at the end of the day the consumer is the market(not stockholders) and if the consumer can’t afford, they won’t leverage = game over.

“Keynesian economics is the theory that when consumers don’t spend sufficiently, in the opinion of the government, then the government should seize their money and spend it for them.
It does sound farmiliar.”

Mav and I have our disagreements, but I absolutely agree that credit expansion in Australia for the last decade has been MOSTLY sunk, completely zero-sum, into the price of unimproved land with nil increase in productivity, rather than into actual construction, and rather than into productivity-increasing capital.

I also agree that the “stimulus” effect from rate cuts is nearing saturation.

I have NEVER believed that monetary policy can counter a house price bubble where the underlying problem is a de facto quota scheme in the land for urban expansion, caused by regulation. Tightening credit sufficient to slow the bubble, would kill the productive sector – and has done so. Loosening credit to give the productive sector a respite, results in the bubble taking off again with a hiss and a roar, and comparatively little of the credit expansion going into the productive sector anyway.

It is like a very virulent cancer that is capable of surviving doses of chemotherapy that will kill the victim anyway. I cannot understand why central bankers are so b—-y clueless about this. Don Brash, when at the RBNZ, was a rare and honourable exception.

There was a time when I thought Glenn Stevens and his colleagues got it; but the dark side got them somewhere along the line.

And there was a story this morning in Adelaide Now (the online Advertiser) about builder/developer McCracken Homes going into receivership. By lunchtime the story was removed and the links cut. The industry must be freaking out and applying pressure to the media. How long can it last?

Why reduce land prices? The lull is temporary and all these interest rate reductions are almost about to bring about the next boom. Just got to hang in there, the boom is coming! Everyone who owns some sort of property and wants to sell it knows this. Just hang in there and DO NOT capitulate like the doomsayers want.

I have sometimes referred to the Netherlands solution, where the government compulsorily acquires land for urban development and ensures that there is no “planning gain” built into the cost of new housing. But I can see that many government agencies around the world with semi-monopoly holdings of land, abuse their power to maximise their own revenue, with total disregard of housing affordability and social justice.

This is the case in Nevada and Arizona, and it looks as though State government bodies in Australia are no better.

I wish for a stable market that provides adequate amounts of housing, continuing employment for construction / RE professionals, and an optional store of wealth for those who choose to buy instead of rent.

I didn’t wish for any of the mess that its in now. I do wish it would be fixed though, even if the transition is painful.

Maybe it was the wishing of people who wanted ‘ever increasing house prices to moon’ that got us here in the first place?

It’s no ones fault but the company themselves. They have ended up with a poor cash flow situation – it will be the subcontractors who take it on the chin – they are heavily exposed and have no security for monies owing.

I agree that in a situation like this its the debt usage decisions of the past that will kill, not the low volumes directly.

Ditto on the point of internet commenting achieving nothing – other than hopefully educating yourself from the discussion.

What do you think about the states in the slow lane Peter – do you think the big developers should cut the crazy offers and just reduce prices, or should they sit pat and wait for a turnaround in the hope it comes before debt immolation? Also do you think reducing land prices would be enough to bring FHBs back in those states?

I don’t know enough about Becton to comment. They have several arms and it could be one of those arms or all of them that caused the problem – I’m sure that all will be revealed in time.

As a general rule both developers and construction companies live by the skin of their teeth – they are not the cash cows that people think they are. I would never touch shares in them even in the good times.

The toys they offer are affordable for them, and the market is competitive. Maybe it gives them an edge, but if they all do it then there is no marketing gain.

First home buyers are unsuited to construction in this market. The FTB’s seem to know that, banks know it, brokers know it – could someone tell the state governments please – they seem to be unaware.

When valuers realise that market prices are rising (which they are) then it may improve a little, but I still believe they have the FHOG policy all wrong if they wish to drive construction. Let the FHB’s buy existing and then push the upgraders towards construction via policy – simple.

I have said more than once that anyone that looks at a history of urban property markets in the UK since their 1947 urban growth containment policies were imposed, can predict where Australia is headed.

Relentless increase in the cost of urban land.

Relentless reductions in land consumption per unit in new developments, but never sufficient to restore “affordability” in the face of the rising land prices regardless of how much tighter the developments get. (They are now up to 20 units per acre average).

Increased cyclical volatility in the price of urban land, although the “trend” remains ever upward.

Relentless shrinkage of the “construction” sector. Response to each demand cycle in “supply”, is weaker and weaker, while response in “price” gets stronger and stronger. In fact there is now no discernible response in supply at all. It remains pathetic and piddly under all demand conditions.

Bankruptcies and buy-outs in the construction and development sector. Competition reduced as fewer and fewer players survive, reaping the increased gains to the high risk that has eliminated their competitors.

“Vertical integration” the new norm in property development – only professional “land banker” and process-gaming developers survive, making most of their profits on legal and political gaming of the planning system, not actual building.

Australia, you have been warned. The longer this goes on, the more impossible it gets to reform. This is because the longer it goes on, the greater the amount of security for debt is tied up in grossly inflated land prices. Reform would not just bring median multiple house prices down – it would enable people to consume 6 times as much land as before, for house prices of half the previous median multiple; meaning that the cost of the land itself is only about 5% of what it was. Now understand this: the cost of the land is well over half of the “value” of the nation’s urban property – and you will see the dilemma.

Best to reform long before this point, huh? I say the UK is a dead economy walking.

Spot on. Some hard up for cash European bank (can’t recall which) sold their Becton stake to GS for pennies on the $. GS is simply following the fastest way to a pot of money via a liquidation of assets.

Maybe its about an even bigger game even than the screwing of passive shareholders.

I wouldnt have thought there would be that much in shorting them.

But if you wanted to short something in Australia, what would you want to short?

Now if you wanted, for example, to short megabank, would you want a handle on something which could undermine sentiment about 60-65% of their lending, and at the same time put the value basis of a large part of the collateral megabank uses to secure circa 25-30% of its funding under question?

And if you wanted to have (or easily be in a position to have) a trigger of sorts to shape the investment narrative, what would you look for?

And what sort of organisation would even consider that sort of thing?

Hows that for a conspiracy theory after a few evening sherberts? I think I will have some more.

It seems to me Australia’s biggest problem is simply that wages are too low. If wages double or triple than all asset prices will be back into the reasonable ranges. The AUD can then fall to say $3AUD per USD and we’ll all be back in business.

Simple really, the floating exchange rate will act like a shock absorber and the banks especially foreign banks will take it in the pants.

It wont be pretty! that much is certain, but at the other side of today’s distortion we will be in a new world where real productivity is possible. Banks will hate land and love anything with secure external cash flow. Yeepee finally a round where Australia’s manufacturing exporters win and win big.

SWF will definitely be required to manage the mining profits and sanitize them, but isn’t that what should have been done? (look at Norway)

Unfortunately any wage hike will probably kill the last of our exporters before the exchange rate can adjust but whats new there.